Monday, February 19, 2007

Interest rates, again

The Bank of Japan is due to consider once more tomorrow whether it is the right time to raise Japan's interest rates again.

The last time, you may recall, the Bank's policy meeting was surrounded by a storm of debate surrounding comments by senior LDP and government officials questioning the wisdom of raising rates again (discussed in this post).

This time, however, a mere month later, following the Yanagisawa storm and the threat of G7 action on the weak yen at its meetings in Germany earlier this month, there's nary a peep out of the government or the LDP, unusual for the Abe Cabinet, which has been described as having "foot-in-the mouth disease."

His conclusion: "...I don’t think the fundamentals are actually there for a rate hike, unless one prefers to go by some funny numbers."

I'm inclined to agree, but, then again, I've previously described BOJ President Fukui as having an "itchy trigger finger" as far as interest rates are concerned, and this might be a rate hike the Abe Cabinet can get behind: a rate hike could be used by the GOJ to point out to concerned Europeans that the government isn't tampering with the yen, with the recent GDP number -- however ambiguous -- providing cover for the move. Without the public fuss, a rate hike could allow the BOJ to reassert some semblance of independence -- however the reality plays out in invariably smoke-filled rooms in posh drinking establishments.

So the question of how big the rate hike will be depends on one's view of how Japanese monetary policy is made. If the BOJ is truly independent, look for something bigger, perhaps even on the order of fifty basis points; if it's not, look for something smaller, that serves both the government's and the bank's political needs.

1 comment:

A fifty beeper will be an 'audacious' move, given the lingering doubts on sustainability of the growth and low inflation, not to mention the inclination of the political establishment for low interest rates.

Although market is sharply divided, I think a 25 bps increase is not unlikely and the economy should be able to absorb it. It's high time Japan started to move towards a more 'normal' interest rate regime. Interest rates in all major economies have moved up significantly in the past couple of years and rates in Japan cannot afford to be out of sync for long.